Some Net Retailers Aren't Buying Online Sales Tax Proposal

The Senate on Monday approved a bill to allow states to collect sales taxes from online retailers. Proponents say sellers will get help navigating tax collection, but many retailers says complying will be burdensome and opens the door for unforeseen problems.

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Originally published on May 6, 2013 7:00 pm

Congress is considering a bill that would allow states to collect sales taxes from online retailers. Proponents say a law is necessary to level the playing field with brick-and-mortar stores and to raise revenue for states.

Simply put, the Marketplace Fairness Act would require any online retailer with more than $1 million in annual sales to collect and remit sales tax. But Joseph Henchman, a vice president at the nonpartisan Tax Foundation, says it's not that simple. He says the bill, at about five pages of text, is unusually brief. And, he says, it doesn't come close to matching how complex collecting sales tax can get.

"It also doesn't include a lot of detail about implementation," Henchman notes. For example, the bill says the states will have to provide automated tax software to businesses free of charge. But what if a business' existing systems don't work with available tax software? Who pays? What if a state doesn't provide adequate software? To whom should the business take its complaint?

Fearing A Logistical 'Nightmare'

These are the types of questions that dog Stacey Strawn, president of the gift shop Silver Gallery. The business has a small storefront in Waynesboro, Va., but the lion's share of its $3 million in annual sales are made online and over the phone. Strawn, like some other online retailers, is crying foul on the bill. Trying to comply with the law, she says, would "be a nightmare."

If the law passes, Strawn would have to collect taxes for every purchase, then remit them to every state and local government where her customers live. She says software that automates tax collection is not a plug-and-play solution that meets all needs.

"Something gets exchanged and it's sent to another state. Then we have to figure out how to refund the taxes from the first state, collect our refund from that state, then charge the customer the new tax," she explains.

Strawn estimates it would cost $15,000 to set up the logistics, plus ongoing tech support. She says she cannot pass those costs along to her customers without losing business. And another fear: getting audited out-of-state. "What then?" she asks.

Accountants are not only expensive for small businesses like hers, Strawn says, but it's also "hard to find people who are in tune with your business to begin with."

Proponents of the legislation say automated tax software has been around for years and that it works — despite the huge variability in tax rates across the country. Charles Collins, director of government affairs for Taxware, a tax software maker, says a lot of Strawn's concerns are misplaced.

For one thing, companies like his would provide tech support to businesses, Collins says. Also, he argues, technology simplifies most processes, including returns and exchanges, as well as handling audits.

Under the bill, Collins says, the state and the software company would largely handle the burden if a business gets audited. "We or the state would be responsible for resolving those issues," he says. "It wouldn't be any issue that the seller would have to pay."

A New Tax, Raising New Tax Questions

Scott McFarlane, CEO of Avalara, another automated tax software firm, agrees that the law's details need to be fleshed out. But he says the complexities are overstated. "There's certainly questions, but I think they're probably not as difficult an issue as people are making them," he says.

But Henchman, of the Tax Foundation, says he has another, bigger beef with the bill. He argues it's forging an entirely new frontier for taxes. Historically, taxes have always been tied to a physical location; people pay income tax where they live because that's where they use social services. And stores have paid taxes where they operate because they use local roads and so forth.

But this bill is a proposal to collect taxes beyond geographic location. "And that creates a lot of implications for where are we going with everything else," Henchmen says. "Do we apply that to income tax, too, if you're a business traveling coming into the state? Or if you participate in conference calls with the state — is that enough to bring you within the scope?"

The bill now faces more opposition in the Republican-controlled House.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, HOST:

Later today, the Senate approved a bill that would allow states to collect sales tax from online retailers. It's called the Marketplace Fairness Act. And proponents say it's necessary to level the playing field with brick-and-mortar stores, as well as to raise revenue for states. But some online retailers are crying foul. They say that with 9,600 tax jurisdictions around the country, collecting sales taxes will b a nightmare. NPR's Yuki Noguchi reports.

YUKI NOGUCHI, BYLINE: Simply put, the new law would require any online retailer with over a million dollars in annual sales to collect and remit sales tax. Joseph Henchman, a vice president at the nonpartisan Tax Foundation, says it's not that simple. He says at about five pages of text, the bill is unusually brief. And, he says, it doesn't come close to matching how complex collecting sales tax can get.

JOSEPH HENCHMAN: It also doesn't include a lot of detail about implementation.

NOGUCHI: For example, the bill says states will have to provide businesses automated tax software free of charge. But what if a business' existing systems don't work with the available tax software? Who pays? What if a state doesn't provide adequate software? Where does a business takes its complaint?

These are the types of questions that dog Stacey Strawn. She's president of Silver Gallery, a gift shop that has a small storefront in Waynesboro, Virginia, but which does the lion's share of its $3 million in annual sales online and over the phone. She says trying to comply would be daunting.

STACEY STRAWN: It's going to be a nightmare.

NOGUCHI: If the law passes, she'd have to collect taxes for every purchase, then remit them to every state and local government where her customers live. She says software that automates tax collection is not a plug-and-play solution that meets all needs.

STRAWN: Something gets exchanged, then it's sent to another state, then we have to figure out how to refund the taxes from the first state, collect our refund from that state, then charge the customer the new tax.

NOGUCHI: Strawn estimates it would cost $15,000 to set up, plus ongoing tech support, costs, she says, she can't pass along to her customers without losing business. And let's say she gets audited out of state. What then, she asks?

STRAWN: As a small business owner, accountants are - whoo - not only is it expensive but hard to find one people who are in tune with your business to begin with.

NOGUCHI: Proponents of the law say automated tax software has been around for years and works, despite the huge variability in tax rates across the country.

Charles Collins is director of government affairs for Taxware, a tax software maker. He says a lot of Strawn's concerns are misplaced. For one thing, companies like his would provide tech support to businesses. Also, he argues, technology simplifies most processes, including returns and exchanges, as well as handling audits. Under the bill, Collins says if a business gets audited, the state and the software company would largely handle the burden.

CHARLES COLLINS: We or the state would be responsible for resolving those issues. It wouldn't be any issue that the seller would have to pay.

NOGUCHI: Scott McFarlane is CEO of another automated taxware firm called Avalara. He agrees details of the law need to be fleshed out. But the complexities, he says, are overstated.

SCOTT MCFARLANE: There are certainly questions. But I think that they're probably not as difficult of an issue as people are making them.

NOGUCHI: But the Tax Foundation's Henchman says he has another bigger beef with the bill. He argues it's forging an entirely new frontier for taxes. Historically, taxes have always been tied to a physical location. People pay income tax where they live because that's where they use social services. Stores have paid taxes where they operate because they use local roads and so forth. But this bill is a proposal to collect taxes beyond geographic location.

HENCHMAN: And that creates a lot of implications for where are we going with everything else. Do we apply that to income tax too? If you're a business traveler who are just in the state, or if you participate in conference calls with the state, is that enough to bring you within the scope?